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Low Carbon Innovation Coordination Group

Technology Innovation Needs Assessment (TINA)

Offshore Wind Power Summary Report

February 2012

Background to Technology Innovation Needs Assessments The TINAs are a collaborative effort of the Low Carbon Innovation Co-ordination Group (LCICG), which is the coordination vehicle for the UK’s major public sector backed funding and delivery bodies in the area of ‘low carbon innovation’. Its core members (at the time of this document’s completion) are the Department of Energy and Climate Change (DECC), the Department of Business, Innovation and Skills (BIS), the Engineering and Physical Sciences Research Council (EPSRC), the Energy Technologies Institute (ETI), the Technology Strategy Board, and the Carbon Trust. The TINAs aim to identify and value the key innovation needs of specific low carbon technology families to inform the prioritisation of public sector investment in low carbon innovation. Beyond innovation there are other barriers and opportunities in planning, the supply chain, related infrastructure and finance. These are not explicitly considered in the TINA’s conclusion since they are the focus of other Government initiatives, in particular those from the Office of Renewable Energy Deployment in DECC and from BIS. This document summarises the Offshore Wind Power TINA analysis and draws on a much more detailed TINA analysis pack which will be published separately. The TINAs apply a consistent methodology across a diverse range of technologies, and a comparison of relative values across the different TINAs is as important as the examination of absolute values within each TINA. The TINA analytical framework was developed and implemented by the Carbon Trust with contributions from all core LCICG members as well as input from numerous other expert individuals and organisations. Disclaimer – the TINAs provide an independent analysis of innovation needs and a comparison between technologies. The TINAs’ scenarios and associated values provide a framework to inform that analysis and those comparisons. The values are not predictions or targets and are not intended to describe or replace the published policies of any LCICG members. Any statements in the TINA do not necessarily represent the policies of LCICG members (or the UK Government).

Offshore wind TINA

1

Key findings Offshore wind has tremendous potential to replace aging power plant, reduce reliance on imported gas, and meet GHG emissions and renewable energy targets. Innovation is critical to enabling the deployment and cutting the cost of offshore wind, with an estimated saving to the energy system of £18-89bn1 to 2050. Innovation can also help create UK based business opportunities that could contribute an estimated £7-35bn to GDP to 2050. Significant private sector investment in innovation, catalysed by public sector support where there are market failures, is needed to unlock these opportunities. Potential role in the UK’s energy system

The UK has a large natural resource of wind power around its coast, and offshore wind power is a commercially available, proven technology to capture this resource. Over the next decade, offshore wind has the potential to replace much of the UK‟s aging power plant whilst helping to meet our GHG emissions and renewable energy targets and reducing reliance on gas and fuel imports. Offshore wind can be rapidly deployed at scale with fewer planning constraints than onshore wind, has a quicker development time than nuclear power and, unlike CCS, has already been proven at scale. By 2050 sensitivity analysis suggests offshore wind could deliver c.20-50% of total UK electricity generation. This depends primarily on the constraints (economic, technical or public acceptance) to alternatives (onshore wind, nuclear, and CCS), and on the overall energy demand.

Cutting costs by innovating

However, offshore wind power is currently a relatively high cost source of energy. How much and how quickly it is deployed will depend on how successful innovation is in reducing costs. Innovation has the potential to drive down the costs of offshore wind by 25% by 2020 and 60% by 2050. Together with savings in the supply chain and financing, this could reduce the cost of energy to about £100/MWh by 2020 and £60/MWh by 2050. Such improvements would enable large deployment potential, and greatly reduce energy system costs. Successfully implementing innovation would save the UK in the range of £18–89bn to 2050.

Green growth opportunity

The UK could become one of the leaders in a global offshore wind market, with a 5-10% share of a market with potential cumulative gross value-added of between £200 - 1,000bn up to 2050.

The case for UK public sector intervention

To unlock this opportunity there is a strong case for targeted public sector intervention to catalyse private sector investment – there are significant market failures to innovation and the UK cannot exclusively rely on other countries to develop the technologies within the required timescales.

If the UK successfully competes in a global market to achieve the market share above, then the offshore wind industry could contribute £7 – 35bn to UK GDP up to 2050 (cumulative).

– There are on-going market failures, including demand uncertainty (negative externalities), a lack of shared test facility and other infrastructure requirements (public goods), insufficient payback on early stage R&D and insufficient coordination and sharing of data (positive externalities/IP spillover). Other potentially short-term market failures include limited competition in some areas, notwithstanding expected new entry into this industry, and a constraint on capital availability. – The UK has an earlier and greater need for offshore wind than other countries, and UK farms are further out to sea and in deeper water than other earlier adopters.

1

Cumulative (2010-2050) present discounted values for low-high scenarios. Depending on counterfactual methodology (see below), these values could be ~65% lower (i.e., roughly £6-32bn)

2

LCICG

Potential priorities to deliver the greatest benefit to the UK

Innovation areas with the biggest benefit to the UK are: – Test sites and drive train and blade testing facilities to support development of high yield/reliability turbines – Novel/innovative designs of: high yield/reliability turbines, foundations for depths of greater than 30m, cabling concepts, installation techniques that are fast, low cost and can access deep water and O&M vessels/access systems – Developing serial manufacturing/production of foundations – Measurement and sharing of test data The LCICG is already delivering a number of publically supported innovation programmes that are working on addressing most of these innovation areas. Substantial further UK public sector investment is planned, with the LCICG members together expected to invest in excess of £100m of funding over the next 3-4 years, leveraging up to three times that from the private sector. To realise the full benefit from innovation over the following 4-10 years will require on-going support to existing areas, scaling up a subset as they move from design to demonstration, as well as adding a prioritised set of new programmes. Supporting all the prioritised innovations would require a significant increase in public sector funding to UK projects in future funding periods. Resources will therefore need to be targeted on particular areas but material impact can be achieved by doing so.

Offshore wind TINA

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Chart 1 Offshore wind TINA summary

Sub-area

Focus

Value in meeting emissions targets at low cost £bn2

Value in business creation £bn3

Key needs for public sector innovation activity/investment

Funding for demonstration sites (both on wind farm extensions and at national centres); accelerated consenting to enable testing of innovative designs Drive train and blade testing facilities High yield / reliability turbines

Turbines

Coordinated pooling and dissemination of reliability data

11 (5 – 19) 4 (1 – 7)

Funding to develop novel components and demo turbines for testing new components Product and process development – not core to innovation support, but critical complementary support to the creation of competitive advantage

High yield arrays

6 (2 – 10)

Funding wake effects measurement and modelling

100m Currently high voltage AC (HVAC) cables are used to link turbines to an offshore substation, with power clean-up at each turbine HVAC cables are also used to transmit power to the onshore substation as current wind farms are relatively close to shore within (60-80km)

13%

Collection & Transmission

Currently oil & gas vessels that jack-up from the seabed to install the foundation and turbine. Dynamic positioning (DP2) vessels have also been used to a certain extent, but this is not yet the norm

22%

Installation

Current access technologies involve helicopter transfers and direct boat access from shore which works best in calm seas Limited remote condition monitoring

18%

O&M

Source: Carbon Trust „Offshore Wind: Big Challenge, Big Opportunity‟ (2008), BVG Associates, Expert interviews

7

% COE

Offshore wind costs (and those of other generation technologies) depend critically on factors such as the level of competition in the supply chain, efficient financing mechanisms, world commodity prices, and the value of the Pound. For example, the cost of offshore wind is believed to be about 50% higher than it might have been had the Pound held its value of 3 years ago, and commodity prices not risen. This analysis holds those other factors constant, focussing instead on the impact of innovation. As such, the anchor costs of £140/MWh does not necessarily represent the actual costs, but rather a reasonable base cost from which to assess the potential for innovation improvements.

5

6

LCICG

Cost savings through economies of scale and innovation Offshore wind power is a relatively nascent technology compared to the gas, coal and nuclear technologies that make up the majority of our current generation mix. Offshore wind power has been deployed at scale since 2002. It has been proven to operate in harsh offshore conditions. Nevertheless technologies are largely based on modified onshore wind turbines and oil/gas foundations. Further innovation is required at both a system level and in each sub-area to reduce costs and enable deployment in deeper water, further offshore.

Innovation opportunities over the next 10 years can bring down the deployment costs of offshore wind by up to ~25%, with further savings after 2020 likely to bring down costs even further (up to c.60% by 2050). Cost savings are also possible in the supply chain and financing. Combined with a high level of innovation, the cost of energy from offshore wind power would be about £100/MWh by 20208 and £60/MWh by 2050 (see Chart 3).

Chart 3 Potential impact of innovation on levelised costs of an example offshore wind site £/MWh 160

Some potential for further cost rises or declines due to foreign exchange, increased competition and commodity costs - not modelled1

140

Base case ‘learning by doing’

120

100 Innovation opportunities to 2020, followed by ‘learning by doing’ only

80

60

40

20

Cost saving vs. 2010 2020

2050

-3%

-14%

RD&D to 2020

-24%

-35%

RD&D to 2050

-24%

-58%

Base case

Full ‘learning by RD&D’ to 2050

0 2010

2015

2020

2025

2030

2035

2040

2045

2050

1 Such factors were taken as independent of innovation improvement potential, and its value. Hence the analysis normalises for these factors (i.e. holds them “constant”). For this reason today‟s levelised costs estimate of ~£140/MWh may be somewhat lower than current estimates. This has no impact on our main conclusions. Source: Carbon Trust „Offshore Wind: Big Challenge, Big Opportunity‟ (2008); DECC „2050 Pathways Analysis‟ (2010): ETI ESME; UKERC „Great expectations: The cost of offshore wind in UK waters‟ (2010); Carbon Trust „Focus for success‟ (2009); expert interviews; Carbon Trust analysis

8

The Crown Estate and DECC have created the Offshore Wind Taskforce to look at how we can reduce the cost of offshore wind to £100MWp/h by 2020

Offshore wind TINA

The scenario „Innovation opportunities up to 2020‟ is based on a bottom-up assessment of highest potential cost and yield improvements identified and potentially commercialisable by ~2020 as shown in Chart 4. Full innovation until 2050 is a top-down assessment of the long term potential for cost reduction and yield improvement, with c. 50-60% reductions in CAPEX and OPEX.

7

These estimates include maximum innovation potential, combining „learning by research‟ (driven by RD&D spending)9 and „learning by doing‟ (achieved through the incremental learning associate with increased deployment alone)9 – the bottom path in Chart 3. This path is steeper than a base case scenario with only „learning by doing‟ (without focussed RD&D activity). The path in-between these in Chart 3 incorporates the maximum innovation opportunities to 2020, followed by „learning by doing‟ only.

Chart 4 Potential cost savings from innovation by sub-area Foreseeable innovation impact potential 1 (by ~2020)

Sub-area

Type

Turbine

High yield / reliability turbines

8% yield increase

High Yield arrays

4% yield increase

1000

Cost savings4 from 'learning by doing' improvements (2010-2050)

9

Cost savings4 from 'learning by RD&D' improvements (2010-2050) to be commercialised by 2020

13

Cost savings4 from 'learning by RD&D' improvements (2010-2050) to be commercialised post-2020 Cumulative system costs from 2010-20504 with innovation

3

>1000

1

Cumulative levelised cost of offshore wind capacity installed between 2010 and 2050 discounted to 2010 using the social discount rate £254bn is the total actual cost of deployment (medium scenarios), it does not represent the additional cost over the best high-carbon alternative About £2bn of the 2020 deployment cost saving will be delivered by 2020, equivalent to about £4bn of capex between 2010-20 4 Cumulative system costs and savings are as calculated by running one representative scenario in the ESME model (with TINA-specific assumptions) without cost improvements. Model assumes ~80% reduction in greenhouse gas emissions by 2050; The total cumulative system costs are highly sensitive to all assumptions in the model, and to avoid “false precision” we do not provide a precise figure; for similar reasons cost savings estimates are also highly sensitive. 2 3

Source: DECC „2050 Pathways Analysis‟ (2010); UKERC „Great expectations: The cost of offshore wind in UK waters‟ (2010); expert interviews; Carbon Trust analysis

Offshore wind TINA

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Chart 6 Potential cost savings from 2010 to 2050 by sub-area (medium deployment scenario) Remote monitoring/O&M planning Improved access 4% technologies 10%

High yield/ reliability turbines 24%

Increased installation rate/deep water 16% High yield arrays 13% Improved intra array connections 10%

Foundations < 30 m depth 9%

Foundations >30m depth 14%

Source: Expert interviews (including input from ETI, RPS, GL Garrard Hassan, RUK, and developers), DECC, UKERC, Carbon Trust analysis

A large global offshore wind market

competing against established foreign competitors, to 15% in installation, leveraging the UK‟s skills from the North Sea oil & gas industry.

A large amount of offshore wind power is required globally as well as in the UK, with IEA estimates ranging widely from around 100GW to over 1,000GW by 2050:

£10 – 35bn net contribution to the UK economy

Green growth opportunity

Low scenario (32GW by 2020, 119GW by 2050) if the world fails to remain on a path to 2 degrees Celsius and/or few constraints on nuclear and CCS, and/or electricity demand is low, relatively Medium scenario (86GW by 2020, 439GW by 2050) the world keeps on a 2 degrees path and few constraints of nuclear and CCS High scenario (118GW by 2020, 1142GW by 2050) the world keeps on a 2 degrees path and there are strong constraints on nuclear and CCS Across the low-medium-high scenario, the global market turnover by 2050 could grow to £16bn – £168bn (£56bn in medium scenario) (undiscounted). In the medium scenario, this represents potential cumulative, discounted GVA between 2010 and 2050 of £526bn.

If the UK successfully competes in a global market to achieve the market share above, then offshore wind could contribute c.£2.6bn (£0.8 – 7.4bn)10 in GVA per annum by 2050, a cumulative contribution11 of c.£37bn (£14 – 69bn)10 to 2050. It may be appropriate to apply an additional displacement effect since part of the value created in the export market will be due to a shift of resources and thus partly cancelled out by loss of value in other sectors. Expert opinion has roughly assessed this effect to be between 25% and 75%, so we have applied a flat 50%. Including this displacement factor, offshore wind would still make a net contribution of £1.3bn (£0.4 – 3.7bn)10 in GVA per annum by 2050, a cumulative contribution of c.£18bn (£7 – 35bn)10 to 2050.

The UK could be one of the market leaders The UK is well positioned to become one of the leaders in the global offshore wind market, achieving a market share of 5-10% in 2050. It can leverage its capabilities from the offshore oil and gas, maritime, aerospace and other sectors which allow the UK to create a strong position in turbines, foundations, installation and O&M. Market shares will vary by each sub-area (turbine, foundation etc.), from 3% in turbine components,

10 11

Medium (Low – High) deployment scenarios

Discounted at 3.5% to 2035, and 3.0% between 2035 and 2050, in line with HMT guidelines

10

LCICG

The case for UK public sector intervention Public sector activity is required to unlock this opportunity – both the £45bn reduction in the costs to the energy system from learning by research, and the c.£18bn net contribution to UK GDP from new business creation.

Market failures impeding innovation A number of overall market failures inhibit innovation in offshore wind, especially critical failures in market demand (externality effects) and infrastructure conditions (public good effects). Significant failures in supply conditions (e.g. oligopoly power and constraints on capital availability) also exist, but are expected to be ameliorated in the future.

The UK cannot rely on other countries to drive innovation with the required focus and pace For most offshore wind technologies, the UK cannot wait and just rely on other countries to intervene in tackling these market failures, and in driving innovation with the focus, and at the pace, required for UK value creation. Overall, the UK has an earlier and greater need than other countries: Offshore wind comprises a much larger share of UK renewable resource than in most other countries The UK lags behind its European peers on renewable deployment with only 4% of electricity demand compared to a 15% EU average. Germany and China both have ambitions to deploy double-digit GWs of offshore wind capacity, but have fewer pressing requirements driving for significant deployment by 2020

Within the value chain, the critical market failures have most impact on: turbine and foundations o

test sites / facilities

o

associated monitoring and pooling of reliability data

o

development of novel/innovative concepts

sharing wind farm wake effects data

UK RD&D programmes have been among a handful of leaders in offshore wind, and there would be some time lag before other major programmes were able to catch up and supersede UK efforts given that they start from a lower base Finally, the UK has specific needs in the technology subareas:

innovative installation methods and vessels

Foundations – the UK has a greater need than most others for 30-60m foundations and a potential specific need for 60 - 100m foundations; it could potentially rely on others for very deep water (100m+) foundations

These are further detailed in Chart 7 below.

Installation and O&M – to meet ambitions some UK farms will have to be in deeper water and further out to sea than other earlier adopters O&M – UK farms have larger arrays and some are in tougher wave climates12 and further out to sea than other earlier adopters

12

The Dogger Bank and west coast of Scotland have particularly tough wave climates

Offshore wind TINA

11

Chart 7 Market failures in offshore wind innovation areas Sub-area Turbines High yield/ reliability turbines

What market failures exist? 1. Test sites and facilities lacking due to high capital costs, demand uncertainties and private sector coordination failures Turbine manufacturers lack the capability to develop their own test sites, and so rely on national centres or developers to provide sites Developers are reluctant to add risk, cost and complexity to their commercial projects to test new technologies Where developers do have positions in their wind farms to test new technologies, they may not have a sufficiently broad consenting envelope

Assessment Critical failures

2. Coordination failures (positive externalities) including a lack of monitoring and pooling of reliability data 3. Barriers to developing novel/innovative concepts – barriers to entry, risk aversion, long lead times: High barriers to new entrants – need a track record of operating hours but investment is high to get to this point without an order book Construction and operating risks can have a catastrophic impact on IRRs, so developers are unlikely to add additional risks to the project therefore Product lead times are very long (5-10 years) (i.e. negative externalities)

Turbines - High yield array

4. Lack of competition may hinder turbine innovation (i.e. imperfect competition and high barriers to entry). The OSW turbine market is currently dominated by a limited number of firms; however, entry by other players are expected soon

May ameliorate in future

5. Insufficient sharing of array performance data due to perceived risks of losing competitive advantage (i.e. positive externalities/coordination failures)

Significant failure

Foundation

See 1 and 3 above impacting test sites/facilities and novel/innovative concepts (including serial manufacturing processes) and aligning developers, turbine manufacturers, foundation designers and test sites

Critical failure

Collection & Transmission

See 1 and 3 above impacting new solutions

Significant failure

Similar to 4 above - both switchgear and cabling markets dominated by l large players,) (i.e. barriers to entry and immateriality)

Important failure

Uncertainty on future offshore wind demand inhibits investment in innovative installation methods and vessels - installation vessels are high cost (~£100m), long lead time (3-4 years) items that pay off only over multiple installations (i.e. negative externalities).

Critical failure

Installation

O&M

6.

7. Uncertainty on future offshore wind demand has particular effect since investments in new access and condition monitoring technologies are substantial for the relatively small O&M play

Important failure

8. There are barriers for companies to collaborate as turbine manufacturers do not want to share product warranty data

Important failure

Source: Expert interviews, Carbon Trust analysis

12

LCICG

These have been prioritised by identifying those areas that best meet the following criteria:

Potential priorities to deliver the greatest benefit to the UK

value in meeting emissions targets at lowest cost value in business creation extent of market failure opportunity to rely on another country

The UK needs to focus its resources on the areas of innovation with the biggest relative benefit to the UK and where there are not existing or planned initiatives (both in the UK and abroad). The LCICG has identified and prioritised these innovation areas.

Innovation areas with the biggest relative benefit from UK public sector activity/investment The LCICG has identified the areas of innovation with the highest relative benefit from UK public sector activity/investment13. These are high yield/reliability turbines and increased installation rate/deep water installation innovations, followed by high yield arrays, deep water foundations (30m+) and improved O&M technologies (see Chart 8).

Chart 8 Benefit of UK public sector activity/investment by sub-area and technology type

Type

Value in meeting emissions targets at lowest cost £bn1



High yield/ reliability turbines

11 (5-19)



High yield arrays

6 (2-10)